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Final

# EXAM REVIEW.doc

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School
Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
ECON 1B03 EXAM REVIEW OPPORTUNITY COST = what you give up to get something else - the best forgone alternative EXAMPLE: To get 3 CDs, give up 1 DVD To get 1 CD, give up 1/3 DVD => Opp. Cost of a CD is 1/3 DVD COMPARATIVE ADVANTAGE = you have it if your opp. cost of producing a good is lower than someone else’s => specialization and gains from trade ABSOLUTE ADVANTAGE = your economy is more productive in all goods CHANGE IN DEMAND = shift of the demand curve due to a change in income, taste, population, prices of related goods, expectations CHANGE IN QUANTITY DEMANDED = movement along the demand curve due to a change in the price of the good CHANGE IN SUPPLY = shift of the supply curve due to a change in production costs, number of firms, expectations, prices of related goods produced CHANGE IN QUANTITY SUPPLIED = movement along the supply curve due to a change in the price of the good NORMAL GOOD = when income increases, demand increases INFERIOR GOOD = when income increases, demand decreases ELASTICITY = measures the responsiveness of quantity of a good demanded (or supplied) to a change in: - price of the good - income - if positive, normal good - if negative, inferior good - price of a related good - if positive, goods are substitutes - if negative, goods are compliments Elastic = highly responsive, | E | > 1 Inelastic = not very responsive, | E | between 0 and 1 (fraction) If a good is inelastic, an increase in price => increase in TR If a good is elastic, an increase in price => decrease in TR FIXED COSTS -do not vary with output VARIABLE COSTS -depend on quantity produced MARGINAL PRODUCT OF LABOUR = change in Q change in labour AP intersects MP when AP is at its maximum. Total Product Q is maximized when MP = 0. SOME COST AND REVENUE RELATIONSHIPS: TC = TFC + TVC ATC = AFC + AVC MC = change in TC change in Q TR = PQ MR = change in TR change in Q PROFIT = TR – TC and PROFIT = (P – ATC)Q Any profit-maximizing firm will produce Q such that MR = MC. PERFECT COMPETITION (COMPETITION) -many firms -homogeneous goods -firms are price takers -free entry or exit -P = MR = AR = D -firms max profit where P = MC since P = MR -supply curve is MC above min AVC -SR temporary shutdown if P < minAVC -LR exit if P < minATC; entry if P > min ATC Example: Market price is P = \$70 Firm’s MC = 30 + 2Q 2 Firm’s TC = 30Q + Q Set P = MC 70 = 30 + 2Q Q = 20 Firm’s profit = TR – TC
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